Have we lost a sense of propotion ?

Here is a snip picked from Economic Times



We seem to creating a ruckus about 27 Cr that Mayawati is planning to waste & nothing about the 10,000+ Crores that the Delhi Govt is planning to waste?

Capital expenditure vs Total expenditure

If the 6.8% Fiscal deficit was not bad news enough, here is something more to be worried about.An analysis of the Plan-Capital Expenditure from the 1995-1996 budget to the 2009-2010 budget shows that the government is spending a smaller percentage of its total spending on creating new "infrastructure" ( Capex in the Plan). The capital expenditure portion of the planned expenditure has dropped from about 10% in the pre 2004 period to about 4.5% now ( Yellow line) . And we are blaming the world economy for India's slowdown ?
And look at the hockey stick in blue ( Total expenditure). Insolvency in the offing ?




Here is the table

Year	Plan - Capital Expenditure	Total Expenditure	Plan Capex as % of Total
1995-1996	18262	183004	9.98%
1996-1997	22530	202298	11.14%
1997-1998	24510	235245	10.42%
1998-1999	26923	281912	9.55%
1999-2000	31264	303738	10.29%
2000-2001	33134	335523	9.88%
2001-2002	37320	364436	10.24%
2002-2003	41420	404013	10.25%
2003-2004	43421	474255	9.16%
2004-2005	47714	505791	9.43%
2005-2006	29638	508705	5.83%
2006-2007	28146	581637	4.84%
2007-2008	31913	709373	4.50%
2008-2009	41301	900953	4.58%
2009-2010	46751	1020838	4.58%

Capital preservation mode

Most of my friends know that I have been in a capital preservation mode for quite some time now. There is nothing that I would like better than to able to preserve the purchasing power of my capital for the next couple of years. (i.e a 0% real return would be considered a crowning achievement )

I do not have an answer to the questions that I had way back in December 2007. But the scenario that I had expected seems to be unfolding. The Fed is fighting to inflate and at some point it should succeed ( i.e arrest fall in nominal prices). Whether the US goes the Wiemar way or manages a 1970s rerun is still a matter of great debate.

Given this scenario & its impact on India, my inclination has been to hedge with investments in diversified asset classes with the hope that the losses in one can be offset by gains in another. Just to give you a feel of how confused I am, here is a break up of my portfolio over the past year. (And yeah I took my advice given on this blog in Dec 2007 and only have money that I can afford to lose on the stock market.)


Oct 2007
85% Stocks
5% ETF Gold
10% Cash

Dec 2007
75% Stocks
18% Liquid Funds
5% ETF Gold
2% Cash

March 2008
35% Stocks
40% Liquid funds
5% ETF gold
20% Cash

Oct 2008
20% Stocks
7% Short term Gilts
33% FD in public sector banks
5% FMP
15% Gold ( both physical & ETF)
17% Cash in public sector banks
3% Cash in other banks

Should we prepare for a 70s rerun ?

The present government has successfully moved India back to the nineties.

• The era of shortages is back ( diesel/power/LPG)
• Rupee is nosediving
• Fiscal deficit is alarming
• Inflation is back in double digits & continues to remain there
• Kashmir is back in the political centre stage

Would the next government takes us back to the seventies ? By that I mean

• Will our taxes sky rocket ?( Marginal Tax rate was as high as 97.5% in 1971 !)
  
• Will ULCA, FERA and other such acts make a comeback ?
  
• Will banks be nationalized once more ?
• Will Gold controls be reimposed ( I know it is a late 60s act rather than a 70s one )
• Will possessing 1000 rupee notes become illegal again ?

Whether we move back to the seventies or bounce back to the noughties would depend on who comes to power. My guess would be

• A Congress/Left would push us back to the seventies,
• A Congress/Riff Raff would slowly move us in the direction of the noughties
• A Congress majority would put us clearly in the noughties
• A BJP/Riff Raff combo would also move us in the noughties direction
• A BJP majority would put us clearly in the noughties
• A Riff Raff with outside support from either the Congress/BJP would leave us in status quo ( i.e stuck firmly in the nineties)
• A Riff Raff/Left combo could even take us back to the seventies in double quick time

Just my opinion. As usual feel free to disagree.

Taming Inflation

India's inflation numbers last week stood at 11.05% and will most likely go up when next week's numbers are out ( Base effect + The effect of the oil price hike flowing through the system ). The government is reaching out into its 1950s & 1970s idea cupboard for solutions to fight the inflation.

The government would do well instead to think of solutions that are more appropriate for India in 2008. The two big difference between 1970 & now is
1) The public sector no longer is the dominant force in the industrial land scape.
2) The middle class has grown in size. It has a rosier outlook to the future & has mortgaged parts of future earnings to improve its current life style.

A 1970s response of price caps & increased interest rates is just going to result in shortages on one hand & an angry middle class on the other hand. A better response would be to cut the exorbitant indirect taxes that the government charges. The steps that the government should take are

1) Slash Cenvat rates for excise to 12% from the current rates of 14%/
2) Slash service tax to 12% from the current 12.5%
3) Remove the cess on excise & service taxes
4) Move petrol & diesel to "declared goods" list , and let the oil companies price it at market driven prices

With these measures the inflation worry will disappear and will be replaced by the "Where will we find the money for all our pet schemes" worry. The excise cut impact will most likely be offset by rising production and the already risen prices ( i.e these measures will stop the further rise of prices, but are unlikely to roll them back, so excise duty would any way be higher than what the government had budgeted).
For the tax losses to the state government on petrol & diesel, the central government could hand over the oil bonds that it has been paying the oil companies.

Will the centre follow this approach ? From the RBI action yesterday ( raising CRR & Repo rates by 0.5%) it looks like the Government continues to live in the past. Will RBI at least be sensible this time by letting the Rupee appreciate against the Dollar( or better still force the rupee appreciation by dumping the enormous quantities of fast depreciating US Dollars that it owns ?) . We will have to wait and see.

Will things change?

Pratap Bhanu Mehta has written a wonderful column today in Indian Express. Touching stuff.The worst part is that this could have been written 20 years ago, and it would still have reflected the reality then ( except the hopeful part, where he expects the expanding economy to provide opportunities, something no one could have told us when we were younger.)

With the cut-off marks for admissions rising, it is hard to know what genuine consolation to give to thousands of disappointed students. We can say to them: don’t interpret your inability to get into a college of your choice as your personal failure. It is our collective failure. Obdurate politicians, control-freak bureaucracies, insecure academics, ideas of social justice conceived in bad faith, the poverty of our imaginations, and our preference for control over freedom, levelling over distinction, have all conspired to ensure that you get very few choices. Consequently, that half an extra mark seems life-defining.

Call their bluff

The Government has finally bitten the bullet & hiked fuel prices. As expected those that enjoy power without responsibility & those that think they have no responsibility are yelling for a roll back. The Government is finally now in a position to call their bluff.

The Government should wait for the agitation against the fuel price hike to reach a crescendo (which I expect it will in another couple of days) and then go ahead and declare diesel & petrol as "declared goods". This would mean that the exorbitant sales tax that state governments charge will be capped at 4%. This should bring down the fuel cost to below what prevailed before the hike.

For example in Hyderabad
Petrol price per litre before hike: Rs 51.1
Petrol price per litre after hike: Rs 56.65
Petrol price per litre if petrol is taxed at 4%: Rs 44.30

This allows the government the leeway to even let the oil companies set the price based on global prices, thus removing a huge headache for the government.

This move would lead to shortfall in the money available to the state governments. but that should not worry the Congress too much. The Congress does not have too many state governments, while those that are shedding crocodile tears on the behalf of the common man have a number of states under their belt. The opposition would find it difficult to protest this move as their wish to protect the common man would have been conceded (It is just that their governments will have to foot the bill instead of the centre!). Also the states having lower money to spend would increase Congress' chance of making a come back in these states.

One tight slap

Here is a possible response to the Petroleum Minister's proposal to levy a cess on income tax payers in lieu of a hike in the price of fuel. Get hold of your neighbourhood Congress man and give him one tight slap. Sounds ridiculous ? But that is exactly what the minister is trying to do. He dare not pass the price increase to the consumers of fuel so he has decided to hit a soft target i.e the income tax payer. We the people cannot give the minister the one tight slap that he deserves so we hit another target. How different is that ?

Bangalore is still under represented

Bangalore now sends 28 representatives to the Karnataka assembly ( Up from 16 after the recent delimitation exercise). Even after this massive increase in the number of MLAs it sends, Bangalore is still under represented by 8 to 9 MLAs. Imagine having 36-37 MLAs for Bangalore. The whole political landscape changes even more dramatically than what has happened in the 2008 elections

Here is the analysis based on the data supplied by the Election Commission

Average Number of Voters per constituency = 179336
Total Deviation for Greater Bangalore = 1552437
Under Representation = 1552437/179336 = 8.66

AC_NAME	TOTALELECTORS	Deviation
Yelahanka	241439	62103
K.R. Pura	308339	129003
Byatarayanapura	265952	86616
Yeshvanthapura	265174	85838
Rajarajeshwarinagar	301531	122195
Dasarahalli	291000	111664
Mahalakshmi Layout	218552	39216
Malleshwaram	194147	14811
Hebbal	100986	-78350
Pulakeshinagar	184980	5644
Sarvagnanagar	301976	122640
C.V. Raman Nagar	219663	40327
Shivajinagar	166829	-12507
Shanti Nagar	184138	4802
Gandhi Nagar	222144	42808
Rajaji Nagar	183301	3965
Govindraj Nagar	246476	67140
Vijay Nagar	253321	73985
Chamrajpet	214503	35167
Chickpet	207906	28570
Basavanagudi	226320	46984
Padmanaba Nagar	219637	40301
B.T.M. Layout	212808	33472
Jayanagar	189232	9896
Mahadevapura	275328	95992
Bommanahalli	261058	81722
Bangalore South	379115	199779
Anekal	237990	58654

Here is the data for all constituencies